Let's Hope We Don't Have To Go Back To Trading Wampum For Roadkill

When I was a kid, fast food chains weren't as pervasive as they are now. To this day, though, I've never eaten any McDonald's or Wendy's or Burger King or any of that poisonous crap. Fasting seems like a far better alternative. Another thing that was different when I was a kid: no credit cards. Actually Diners Club started around the time I was born but even when I was in college Carte Blanche and American Express were being used-- but only by rich people as far as I know. I was repulsed by the idea of credit cards the same way I was repulsed by the idea of McDonalds. I swore them both off and when I went overseas in 1969 I never even thought of getting one.

I don't recall ever seeing one overseas either-- certainly nowhere in Asia or Africa, but I wound up as the manager of a restaurant in Amsterdam for several years and no one ever offered to pay with one there either. When I returned to the U.S. in the second half of the 70s, people were using them here widely. I resisted but it was hopeless. The system mandated it. It became more and more difficult to go about one's daily business without one. I gave in-- around the same time I swore off cell phones.

One thing I have stuck to, though. I've never paid a dime in credit card interest. I get my bill and I pay it. Much better that way. But the system has definitely been rigged so that its difficult to function as an adult in America without a credit card. After a job, it's the #2 source of consumer liquidity. And, just as jobs are becoming scarce, the credit card companies-- those folks that send you the pre-approvals in the mail every week-- have decided to cut back a bit by $2 trillion.

You know all those billions of taxpayer-- i.e, our-- dollars the Bush Regime has been shelling out to banks to keep the system liquid? Apparently the no strings approach isn't something you can use with banksters. Speedy trials and firing squads are more effective. Bank of America, CitiBank, and JPMorganChase have scooped up half the credit card business in America and, due to risk aversion, they are all talking about cutting back on cards.

Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity.

In other words, they're destroying the economy. Make the trials even speedier. Meredith Whitney, managing director of Oppenheimer & Co, wrote an Op-Ed in yesterday's Financial Times warning of an economic train wreck and the dire consequences of this latest outrage.

For the sake of John McCain, George Bush, Saxby Chambliss and no one else, the National Bureau of Economic Research announced that we've been in a recession for exactly one year. (Who didn't know that?) Yet Ms. Whitney says she's more bearish today than she's been for the past 18 months.

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.

There is no doubt that time will be the greatest healer, but there is a strong argument for putting the financial system through a methadone-clinic-style rehabilitation as opposed to the “cold sweats” rehab that we face. The US government appears to feel the same, which is why various versions of direct government lending and quasi- as well as real bail-outs have been announced. Certainly, credit was extended to unworthy borrowers, but the baby is now being thrown out with the bath water. I expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change.

Here are some easily adoptable changes that would make a difference.

First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.

Second, expand the Federal Deposit Insurance Corporation’s guarantee for bank debt. Banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines. Any semi-conscious bank management team knows that capital and liquidity are precious and therefore is hoarding both.

Third, delay the introduction of accounting rule FAS 140 until 2011 or 2012. These moves to bring off-balance-sheet assets back on balance sheet for the sake of transparency are a mirage. The primary assets that will come back on to balance sheets are credit card loans. Frankly, there is more transparency in off-balance-sheet master trust data than in on-balance-sheet accrual accounting. Banks cannot afford it now and it will further constrain credit.

Fourth, amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines. With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut.

Krugman is also calling for massive intervention by the government-- "a very large fiscal expansion to keep the economy from going into free fall."

Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment-- of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

...[W]e have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

The bottom line, then, is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action, both for today’s workers and for their children, is to do whatever it takes to get this economy on the road to recovery.

I have a good feeling that Obama has assembled a decent economic team and that they are going to make an honest effort to right the ship-- and that they'll do it boldly and competently. They may have a hard time persuading reactionaries from obstructing progress but I'm getting the feeling that most Americans know that it's our only chance. Otherwise Dow plunges of 680 points are going to look like the good old days not too far down the road.

UPDATE: ALL THIS FIRING SQUAD TALK...

Whenever we advocate speedy trials and blindfolds and last cigarettes for economic criminals like the banksters, please keep in mind that we certainly want even speedier trials for the political hacks they buy off and who, instead of tending to the people's interests, tend to the special interests. Take the entire Bush Regime, for example.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying-- along with assurances from banks that the troubled mortgages were OK-- regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

Does "aggressive lobbying" include bribes? And does "bowing" mean stuff wads of cash up your ass?